020. Constructive Dividend - Waiver of Damage Claim Against Shareholder

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Simply put, a German resident corporation pays a constructive dividend to its shareholder by conferring on him a benefit for no consideration or inadequate consideration under the arm's length principle. A benefit in this sense may be conferred by failing to prosecute claims which the corporation has against its shareholder, as a recent case illustrates.

The case likewise illustrates the dual nature of a constructive dividend. On the one hand, the income of the corporation must be increased by the amount of the constructive dividend for both trade tax and corporation tax purposes. This occurs for the year in which its income is affected. On the other hand, upon receipt by the shareholder, a number of important distribution adjustments take place. The corporate tax burden is reduced to 30 % if the distribution comes out of